Building Obsolescence

THE THEORY AND PRACTICE OF BUILDING RENEWAL

UNDERSTANDING, ANALYSING AND PREVENTING OBSOLESCENCE

Preface

This booklet is about the management of building renewal. The argument is that renewal decisions are invariably made to counteract obsolescence. This means that much of the discussion centres on how, in any specific circumstance, our renewal policy is informed by our understanding of the ways in which the building in question is becoming unfit to fulfil its designated purpose.

Many of the ideas and illustrations used in this booklet are derived from a research project undertaken by the Building Research Centre in the Faculty of the Built Environment at UWE BRISTOL. The enterprise was called The CARM Project and it investigated how local authorities and housing association make decisions with respect to the Condition Appraisal and Renewal Management of housing.

One of the primary objectives of the research was to produce materials to underpin the Faculty’s teaching programme and this booklet is an outcome of that aim.

Although the original research concentrated on housing, the ideas in this pamphlet are applicable to the management of all forms of built asset. The approach is unapologetically conceptual and stems from a belief that renewal decisions need to be based on a rational investigation of right conduct that embraces more than just technical considerations. The text makes the point that a rational decision to renew building elements is always a response to obsolescence.

By focusing on the concept of obsolescence the text makes two fundamental points. First, ‘building renewal’ should be thought of as an integrated process covering all activities that are designed to keep a building fit for its purpose. This means that routine maintenance, major repairs, refurbishment/improvement works, and site redevelopment are all embraced by the notion ‘renewal’. Second, a fully rational response to obsolescence should be grounded in an understanding of how the chosen option impacts on the interests of all those who have some current or future stake in the renewal project.

David Garnett

Bristol 2006

KEY TERMS

Obsolete We describe a built asset as “obsolete” when it is judged to be completely and irredeemably unfit for its current purpose. In this extreme case, the rational response would be to clear and redevelop the site or to sell up and relocate.

Obsolescence The process of becoming obsolete. Obsolescence occurs when a building is judged to be becoming less fit for purpose. Obsolescence may need to be counteracted – this brings about the need to make decisions: change the condition; change the form; keep the form/condition and change the use; keep the form/condition and use and change the rent; dispose of the building and move to one in which the form and condition once again fits the function.

Perceived obsolescence Obsolescence is perceived when some aspect of a building’s form, condition or location is judged to cause it to be inadequate for its purpose.

Effective obsolescence Effective obsolescence exists when a perception of obsolescence is acted upon. In allocating resources to decorate, repair, alter, refurbish, improve, demolish or dispose of a built asset we are making effective our perception of obsolescence.

As Daithi D Downey has pointed out (1994 pp.12/13), in the professional and technical literature, building renewal tends to be treated as a linear process in which maintenance, repairs, refurbishment and redevelopment are regarded as differentiated activities that can, and often do, operate independently of one another in a sequence of stages. This concept of a hierarchy of activities is reinforced by financial conventions and funding practices that distinguish between ‘revenue’ projects such as repairs and maintenance and ‘capital’ projects such as improvement and redevelopment.

In contrast, in the academic and policy literature, building renewal is more often treated as an integrated process in which the life of a building is enhanced and extended by interrelated cycles of activity that embrace everything from routine maintenance through to site clearance and redevelopment. This is because there is a strong research and macro-policy interest in the relationship between the cost and quality of initial capital investments and the cost and frequency of subsequent repair and maintenance activities. This relationship is, for example, given clear expression in life cycle costing appraisals[1] and in CBA studies that employ the Needleman decision rule[2].

In this text we will adopt the integrated model of renewal. This is because the research and consultancy work from which our argument is derived, makes explicit connections between levels of refurbishment and subsequent maintenance and management costs. Indeed, developing an understanding of the relationship between the level of investment in construction and major repair works on the one hand and the subsequent costs-in-use on the other has been a constant theme within our research and consultancy programme at UWE.

The idea of ‘sustainability’

Integrated thinking and planning provide the pathway to sustainable outcomes. The notion of ‘sustainability’ has come to hold a prominent place in discussions on a whole range of contemporary issues. It is particularly influential in the field of development economics, and from that position has entered policy considerations about urban renewal where it is looked to as a decision guide.

The consensus about the need for ‘sustainable’ outcomes offers a potential policy focus that can be used to reconcile the competing values, attitudes and interests that are inevitably embedded in a project and its programme of work. The project’s pre-planning[3] should be conceived of as a discursive exercise in which all those with a stake in what happens move towards an agreement about what constitutes a ‘sustainable outcome’. This pre-planning exercise will establish the strategic frame for the programme of work and, given its guiding influence on subsequent activities, it should be carried out in a way that is both systematic and comprehensible.

In the specific case of building renewal this means that we need to take an integrated approach when analysing which of all our choices constitutes the ‘best’ option. If we treat building renewal as a piecemeal, linear, and purely technical process, the outcomes we produce will be ‘sustainable’ only in some limited, technical and fragmented way. Fully sustainable outcomes are grounded in integrated strategies.

Although in recent years the question of ‘sustainability’ has come to the fore in debates about how best to proceed with built environment projects, there is no consensus about what ‘sustainable development’ means. In the context of any specific project, disagreements about the meaning of the concept can be profound. Everyone is committed to making decisions that have ‘sustainable’ outcomes but what this means in practice is sometimes far from clear. Despite the lack of consensus about meaning, simply by articulating a commitment to ‘sustainability’ decision-makers establish a starting point for discussions about what constitutes ‘best action’. The commitment itself provides the starting point for the ‘pre-planning’ exercise and it enables us to make the following optimistic proposition:

The universal commitment to ‘sustainable’ outcomes can be used as a basis for the reconciliation of the range of conflicting interests and competing values that inevitably surround development and redevelopment schemes.

The optimism of this primary proposition stems from two linked ancillary propositions.

First, ‘sustainability’ is not an “essentially contested concept” in the sense of that phrase as used in social theory[4]. In other words, although it is used differently in different contexts, in any particular context its meaning tends not to be contested. A government minister might use the phrase ‘sustainable housing development’ in the context of fiscal support to mean ‘independence from further public funding’ while an environmental scientist might use the phrase in the context of energy conservation to mean ‘the use of resource-efficient materials’. The politician and the environmentalist may disagree about priorities, but once they appreciate each other’s contextual use of the phrase, they are unlikely to argue over semantics.

The underlying proposition of this text is that a pre-planning exercise should establish the context(s) within which ‘sustainable’ outcomes are sought. In this way we argue that the programme of development or renewal work should seek to be ‘sustainable’ in the sense that the decisions we make now remain ‘liveable with’ in the future. We propose that only by taking an integrated approach to renewal can we make decisions that can be regarded as ‘sustainable’ in this sense.

Determining ‘best action’ is always problematic because the future is full of risks and uncertainties. This means that option appraisal techniques should seek to analyse the nature and scope of these risks and uncertainties. However, even if we lived in some fanciful world in which the future was known, there would still be disagreements about what constitutes ‘best action’ because those who have some stake in what happens to the building do not necessarily share the same values and interests. This means that, as well as attempting to assess future technical and financial risks and uncertainties, the option appraisal should also seek to reconcile the competing values, attitudes and interests of those who have some stake in what happens to the building.

In considering when and how to renew buildings, there is no absolute ‘truth’ about what counts as ‘best action’. ‘Truth’ is relative to future events (what is ‘true’ now may not be ‘true’ tomorrow). Furthermore, ‘truth’ is relative to place (what is ‘true’ here may not be ‘true’ “in the north” – or even in some other part of town). ‘Truth’ is also relative to interests and values (what is ‘true’ for you may not be ‘true’ for me). Because truth is such an illusive notion, we propose to abandon the quest for ‘truth’ in favour of a different project – namely….the quest for ‘sustainable’ decisions. The best we can hope for is to make decisions now about our buildings that we do not regret some time in the future. To the extent that we achieve this, we can describe our renewal decisions as being “sustainable”.

Although the essential meaning of the concept of ‘sustainability’ is not contested, it is likely to be defined in different ways in different contexts and, in any particular context, it is likely to mean different things to different interest and power groups. John Pezzey’s trawl through the recent literature[5] well illustrates how the notion of ‘sustainable development’ has now come to have a political potency which, in terms of a guide to policy, elevates it onto that plane of ethical correctness which is inhabited by such other notions as ‘racial harmony’, ‘social justice’, and ‘value for money’. When presented in the context of a specific project, however, like these other notions, its precise meaning may lack clarity. For this reason we will approach the issue of ‘sustainability’ through an analysis of its counterpart obsolescence.

Summary

Based on the experience of our research and consultancy work, we argue the following.

Sustainable decisions seek to alleviate and prevent obsolescence. This means that the pursuit of sustainability involves an understanding of obsolescence.

CHAPTER ONE

OBSOLESCENCE AND THE ‘TIME-COST DILEMMA’

“Time is that in which all things pass away.” (Schopenhauer)

It was Marshall Mcluhan who said that for tribal man, space was the uncontrollable mystery, while for technological man, it is time that occupies the same role.[6] Because buildings are durable artifacts, today’s renewal decisions have consequences that are carried into the future but, as Mcluhan implies, the future is a yet-to-be-discovered ‘place’ full of uncertainties.

The uncertainties we have to consider go beyond issues relating to building technology. As well as technical factors, a decision about what ‘best’ to do with a building, may depend on a range of financial, social, political, environmental, or cultural considerations. In this paper we are arguing that underneath these apparent complexities, lies a simple, speculative truth or theorem.

People take decisions to relocate or alter the physical form of built assets to counteract obsolescence.

By definition, time is continuous and is therefore a constant source of uncertainty. In a technological society, time leads to change, change leads to uncertainty, and uncertainty makes planning both necessary and problematic. To be rational, we should seek to renew buildings now in ways that we do not regret sometime in the future. This means making judgements about future conditions of demand and supply.

The changes wrought by time make us uncertain about the precise nature of all of the following conditions.

Demand-side uncertainties

* Proprietary plans

* Future laws and regulations

* Shifting societal values, attitudes and standards

* Future sale prices

Supply-side uncertainties

* New technical knowledge

* Component life spans

* Future rates of interest

* Shifts in the local economic base

* Future production costs

General approaches to dealing with uncertainty: sensitivity analysis and flexible implementation

The uncertainty conditions listed above are indicative rather than comprehensive and the items are general rather than specific. When applied to a particular project other items may need to be included and the above-mentioned items will need to be more tightly specified. The point being made is simple enough – change leads to uncertainty. It is generally accepted that the greater the uncertainty, the more the need to take what is known as a sensitivity approach to analysis (i.e. one that considers a range of possible futures) and a flexible approach to implementation (i.e. one that keeps key options open). The longer the time horizon being considered, the more will be the need to incorporate sensitivity into the analysis and flexibility into the action plan.

As indicated above, some uncertainties can be addressed to some extent by incorporating them into the report by means of sensitivity analysis. A sensitivity approach to option analysis allows for the presentation of alternative conclusions that will result from making different assumptions about future changes in such variables as interest rates and prices. That is, the report can be designed to show how sensitive are its conclusions to assumptions that are being made about future interest rates, prices, life-spans, or whatever. The use of dynamic, computerised spreadsheets allows the analyst to demonstrate the extent to which particular assumptions are sustainable over a range of possible changes to such variables.[7]

The more sensitive the conclusions are to possible changes in supply and demand conditions and the more uncertain we are about the likelihood of these changes, the riskier will be any recommended course of action. And the riskier the course of action, the more important it will be to proceed in ways that allow for flexibility by keeping open certain key options. Sensitivity analysis helps decision-makers perceive, and thus assess, the financial or other risks associated with a particular course of action. Where risks are high (e.g. where a higher than expected change in interest rates would make the project non-viable) the decision-makers may choose to proceed in ways that keep future options open so as to allow the organization to respond to the unanticipated should it occur.

A general definition of ‘obsolescence’

It might be said that modern industrial societies value innovation more than tradition, choice more than standardisation, and change more than permanence. With the passage of time, standards, tastes, and fashions change and new technologies create new possibilities and demands. Also, with the passing of time, those things we build deteriorate and decay as they are subjected to daily use, gravity, pollution and the ravages of the climate. Furthermore, with time, local economic, social and environmental conditions change in ways that alter the relative locational advantages of one place as against another. The volatility of these three key realities of perceived need, physical condition and best location mean that, over time, there is a tendency for particular buildings to lose their fitness for purpose. This process of diminishing fitness for purpose is called ‘obsolescence’.

It is the desire to avoid obsolescence that acts as a motivating force to maintain, repair, improve, modernise, and renew buildings. Some of this work is reactive, but much needs to be planned for. It is decisions about how to plan for future works that pose particular problems of appraisal. Although the future is full of uncertainties, a ‘sustainable’ maintenance and renewal strategy necessarily needs to be based on judgements about future demands and costs.

Most organisations and households are concerned with the ‘cost-effectiveness’ of their building renewal plans. The effectiveness of a renewal activity is assessed in terms of how well it contributes to the key objectives and expectations of those with some interest in the organisation’s operations. The assessment of effective performance has to be put into some time profile. We need to assess the future consequences as well as the current outcomes of putting money into renewal projects. What counts as ‘rational’ or ‘appropriate action’ crucially depends on the analytical decision time-frame selected. A ‘decision time-frame’ is defined the period of time over which the project’s costs and benefits are to be considered.

Most organizations have near future, intermediate and long-run objectives. Effective building renewal management seeks to achieve all of the following.

2. Adapting appropriately: i.e. altering and improving the stock of buildings to accommodate changing needs and demands in the intermediate future.

3. Surviving appropriately: i.e. investing in the stock so that it continues to contribute effectively to the organization’s objectives into the distant future.

A coherent renewal strategy should be able to articulate, from the point of view of the organization’s objectives, the relationship between near future, intermediate future, and distant future plans. Techniques such as ‘property profiling’ are currently being developed with a view to rationalising near, intermediate and distant future needs (see chapter 5). At this stage in our discussion we will simply make the point that shorter and longer-run aims and objectives often conflict and can thus lead to competing proposals about what counts as ‘best action’ with respect to the renewal of a building or a group of buildings.

In any renewal project, the costs and benefits come on stream at different times. Costs are often front-loaded while benefits take time to come to fruition. Also, the costs tend to be more tangible and easier to quantify than the benefits. This means that, if a short time horizon is taken, there can be a tendency to under-value the project’s benefits and over-value its costs. The technique most often used to counteract this tendency is cost-benefit analysis.[8]

Short and long-term rationalities

The rationalities that stem from market theory, political expediency and budgetary constraints tend to point to relatively short time-frames. In the 1980s and early 1990s in Britain, Conservative governments introduced land-use policies associated with public service provision that shifted the emphasis away from planning models and towards market forces, and this tended to produce relatively short-term decision time horizons. Market forces are relatively reactive to the short-term and less responsive to the intermediate and long-term. Short-termism is also bolstered by pressures for a quick political pay-back and by budgetary constraints that are reinforced by annual audits.

By contrast, the rationalities that stem from technical efficiency and cultural/environmental concerns tend to point to relatively long time-frames. Specialist advice tends to be technically orientated and can be strongly influenced by the professional values and attitudes of the ‘experts’ consulted.[9] Surveyors, for example, tend to point to solutions that they judge to be technically efficient arguing that “if a job’s worth doing it’s worth doing well”. Such recommendations suggest the “need” for long-term technical viability and, thus, relatively high specifications. This rationality may be reinforced by other factors relating to the consultants’ financial and commercial interests (e.g. where fees are calculated on the basis of a percentage of contract price, and/or where the contract makes the consultant liable for future technical failures).

Even longer-term decision time-frames can be used in renewal projects in which environmental or cultural concerns predominate. The renewal of long-established civil engineering structures such as canals, viaducts, tunnels, and harbours, for example, are normally renewed in line with decision criteria that incorporate the interests of future generations of users. Similarly, the renewal of historic buildings tends to involve specifications that assume a long-term physical life during which the basic structure and its fabric will not be substantially altered for reasons of fashion or commerce.

The time value of money

The inclination towards short-termism is reinforced by the fact that we tend to value the present use of money more highly than we value its future use. This proclivity partly stems from the human psyche that tends to predispose us all in favour of immediate rather than later gratification.[10] However, to some extent this predisposition can be shown to have a technical logicality because money has what is known as a ‘time value’. The idea of the time value of money is that a sum of money now is worth more than the same sum of money sometime in the future because, in the intervening period, it can be invested to produce additional economic or financial wealth.[11]

The ‘time-cost’ dilemma

The fact that buildings are durable assets, coupled with the fact that money has a ‘time value’, poses a dilemma for those making decisions about how much to invest in a capital building project. This can be termed the ‘time-cost dilemma‘. The time-cost dilemma can be summarised as follows.

‘Is it best to spend more on the initial building construction and thus achieve relatively low future costs-in-use; or is it better to spend less on the initial construction and instead pay out relatively higher costs-in-use?’

When applied to building renewal projects, the time-cost dilemma makes the assumption that the more expensive the up-grade the lower will be the subsequent costs-in-use. This assumption is reasonable so long as the renewal activity results in a building that remains more-or-less within the same technical specification parameters whether it is renewed to a ‘high’ level or a ‘low’ level. For example, if a defective roof is patched and repaired the initial outlay will be relatively modest, but it may need further works being done in the near future. If, however, it is replaced with new timbers, coverings and fixtures, it will cost more initially but may then be maintenance free for some considerable time. The time-cost assumption that the more expensive the upgrade the lower will be the subsequent costs-in-use may not hold if the renewal activity results in significantly different technical specification parameters if it is renewed to a ‘high’ level as compared with a ‘low’ level. For example, if the ‘higher’ standard involves the installation of (say) central heating or air conditioning, this will automatically impose higher costs-in-use because the ‘higher’ up-grade involves the imposition of additional revenue costs associated with the running of the heating or conditioning system.

Fig.1.1. The Life-Cycle Costs of a Building

Fig.1.1. Demonstrates cycles of maintenance and refurbishment of social housing. Although stylised and simplified, this representation of cost cycles is based on empirical research into property profiling carried out by UWE’s Building Research Centre. It indicates that with each major repairs cycle the general cost profile is raised as more sophisticated facilities are progressively incorporated into each refurbishment.

The time-cost dilemma is simply one way of thinking about the truism with which we began this chapter: that is, to be rational, we should seek to renew buildings now in ways that we do not regret sometime in the future.

Summary

To be rational and sustainable renewal decisions need to produce results that are liveable with into the future. This involves addressing the time-cost dilemma. In particular, consideration of the future involves being clear about the period of time over which the project’s costs and benefits are being considered (its analytical decision time-frame).

The more sensitive the conclusions are to possible changes in supply and demand conditions and the more uncertain we are about the likelihood of these changes, the riskier will be any recommended course of action and the more important it will be to proceed in ways that allow for flexibility by keeping open certain key options.

The object of a renewal decision is to avoid obsolescence. Obsolescence is defined as a process of diminishing fitness for purpose. What counts as fit for purpose depends on whether we take a short or a long-term view.

In the field of building renewal, sustainability and obsolescence can be thought of as opposite sides of the same coin. To say that, in some way, a building’s location, form, or condition is not sustainable is the same thing as saying that the building is becoming obsolete.

Obsolescence is the process by which an object such as a building becomes progressively less fit for its intended purpose. The term ‘obsolescence’ can only be applied to objects that are produced to fulfil some defined industrial, commercial, domestic, social, or welfare function. A non-functional work of art can become ‘unfashionable’, or even ‘reviled’, but it cannot become ‘obsolete’. We can talk of natural resources becoming ‘depleted’ or ‘degraded’ but to describe them as becoming ‘obsolete’ makes no sense.

Unlike works of art and gifts of nature, buildings are produced to fulfil identifiable purposes (even follies are built to amuse), and this means that all buildings have a potential to become obsolete.

With the passage of time, (i) situations and plans change and, (ii) the buildings used in the implementation of these plans deteriorate and decay. This process of diminishing fitness for purpose is called ‘obsolescence’.

Figure 2.1 indicates that the rising costs that result from a building becoming less and less fit for its purpose act as a stimulus to do something. In this way we can say that obsolescence provides the rationale to make renewal decisions. That is, we can argue that these decisions are rational decisionsbecause they are consciously designed to ameliorate or prevent obsolescence.

Fig 2.1

Obsolescence Imposes Costs that Motivate Decisions

Figure 2.1 differentiates between the physical and the economical life of a building by presupposing that it has both a material and a socio-economic existence. By highlighting these two contrasting ‘lives’ a distinction is made between condition decay and functional obsolescence.

The idea that a building has an economic life is based on the following logic. Once constructed, a building has a higher exchange value than that represented by the sum of its parts. This additional value is derived from its potential to generate utility to some occupier/user (i.e. it has a potential to contribute to their proprietary plans). In other words, it has an economic potential that is greater than the sum of its parts.

Most proprietary plans need to utilise built assets. In this way, the economic life of a building can be thought of as that period over which it proves to be the most appropriate (least cost) built asset needed to deliver the proprietary plan. If kept beyond its economic life, a building may continue to give service, but a replacement will do the job more cost-effectively.

With the passage of time, wear and tear, gravity, the ravages of the climate, and insect and fungal attack all combine to alter the condition of a building’s structure and fabric (lefthand side of diagram). Furthermore, as time passes, the industrial, commercial or domestic circumstances of a building’s occupiers or owners tend to alter in ways that reduce its operational effectiveness (righthand side of diagram).

The two sides of the diagram can be causally connected in that the changing condition of a building may impact on the way that it functions. For example, the building may have deteriorated to such an extent that its integrity has become compromised, making it in some way unsafe or unsound. Similarly, physical deterioration may curtail a building’s technical performance and, in so doing, diminish its operational efficiency: it may, for example, become unacceptably cold or hot or noisy. Or it may become dilapidated to such an extent that its tatty appearance harms customer or client relations, thereby damaging the organisation’s reputation or profitability or both.

It is possible for functional obsolescence to occur for reasons that have nothing to do with the condition of the building. Technological advances, for example, may cause an existing factory layout to be no longer appropriate; a commercial restructuring may render an office building redundant; rapidly increasing student numbers may cause a university’s stock of buildings to be inadequate; or a pregnancy may unexpectedly result in the birth of triplets thus rendering a family’s current accommodation unsatisfactory.

Rationalisations and option appraisals

Our general argument is that renewal decisions are invariably made to counteract obsolescence. This means that in any specific circumstance, renewal policy should be informed by an understanding of the ways in which the building in question is becoming unfit to fulfil its designated purpose.

Whether it be a small maintenance job or a major repair project, a decision to renew will involve the utilisation of real resources: the decision will, in the language of the economist, impose an opportunity cost. Like all decisions that employ the use of limited resources, it has to be rationalised and justified (refer to chapter 5 for a fuller discussion on opportunity costing).

A rationalisation is a reason for action. All sane actions are (or at least could be) rationalised. Doing things without being able to explain why is one definition of ‘madness’. A rationalisation is that part of the decision statement that follows the word “because”.

Take, for example, the decision statement: “We have decided to redevelop the site rather than simply refurbish the existing buildings because it will save money in the long run”. The decision is explained by that part of the sentence up to the word “because” – and the rationalisation of the decision is explained by that part of the sentence that follows the word “because”. So we can refer to rationalisations as “because statements”.

When we make a decision that has opportunity costs, it has to be justified and legitimated with a ‘because statement’ (rationalisation). In practice, the ‘because statement’ is likely to be more than a mere half-sentence. It could take the form of a committee report or a full option appraisal document involving cost-benefit analysis, life cycle data, threshold analysis, etc. Whatever form it takes, the rationalisation should be presented in a way that remains open to questioning from those charged with the responsibility for making the resource decision.

We should always be prepared to question the rationalisations of others and allow our own rationalisations to be challenged. Rationalisations should be ‘tested’ by means of an expert system and/or in open debate. Reports that present options to a manager or committee should be consciously written in a way that allows and invites the reader to challenge its conclusions (we often do the opposite).

‘Openness’ is one of the three key principles of writing option appraisal reports. The other two are that the analysis should be ‘systematic’ and the recommendations should be seen to be ‘rational’.

By saying that the appraisal should be rational we mean that any proposals should seek to counteract obsolescence. By saying that the analysis should be systematic we mean that it should employ recognised and appropriate appraisal techniques (such as CBA or life-cycle costing) and be structured into some form of ‘expert system’ that ensures that options, conclusions or suggestions are coherent and comprehensive. By saying that it should be open we mean that the basis of its conclusions should be made explicit and any recommendations should be presented as reasoned suggestions capable of being questioned by the committee of decision-makers rather than as not-to-be questioned, definitive answers or solutions.

By incorporating the three principles of rationality, systematism and openness into the appraisal we seek to produce a report that is grounded in experience and based on research. Any decision model or expert system that is developed from the appraisal should have universal coherence, have an appropriate scope of vision and make appropriate connections. It should also be context-sensitive, so that the universal logic can be applied in a way that is appropriate to the needs of a particular situation.

Summary

A building can be said to have both a physical and an economic life. Over time physical decay can lead to increasing maintenance costs, and functional failure can lead to increasing management costs. These increasing costs are manifestations of obsolescence and may point to the need to make decisions about whether or not to renew or dispose of the building. Such decisions should be based on an analysis that is rational, systematic and open.

CHAPTER THREE

OBSOLESCENCE: A RELATIVE NOT AN ABSOLUTE CONCEPT

“There is no such thing as absolute value in this world. You can only estimate what a thing is worth to you.” (Charles Dudley Warner).

In the final analysis all obsolescence is functional obsolescence. A building cannot be obsolete per se, it can only be obsolete in relation to some identifiable function and with respect to the plans and interests of some identifiable person, group or organisation.

It is the capacity of a building to function in the interests of its owners or users that determines its ‘suitability’ and thus its value. This means that obsolescence is a relative and not an absolute concept. The degree of obsolescence is always relative to the distinctive interests and proprietary plans of identifiable people or organisations.

Fig 3.1

OBSOLETErelative to a

FUNCTION

in which someone has an

INTEREST

Obsolescence may be perceived when some problematic issue is brought to our attention which appears to be caused by the inadequacy of the asset. However, built asset management should not simply be reactive. Those responsible for managing the stock of built assets have to consider whether a building will remain fit for its purpose over time. It is the perception of an emerging mismatch between location, form or condition on the one hand, and our expectations of how the building will need to function to fulfil our proprietary plans on the other, that leads property managers to decide to make some alteration to its siting, structure, fabric or decor.

Take an extreme case: suppose that, in our judgement, the information before us (e.g. condition and post-occupancy survey data) indicates that the building under consideration works perfectly well for our purposes and, what is more, no matter what we do or do not do, it will continue to satisfy our needs for the foreseeable future. In this extreme, and altogether fanciful case, the rational response would be to do nothing.

Take the other extreme case: suppose that, in our judgement, the information before us indicates that the building in its present location, form and condition contributes nothing to our purpose and, what is more, no amount of refurbishment will make it satisfy our needs. We would then describe the asset as “obsolete” (completely and irredeemably unfit). In this extreme, and rather unlikely case, the rational response would be to clear and redevelop the site or to sell up and relocate.

The two extreme cases help us to conceive of perceived obsolescence as a continuum stretching from ‘fit’ to ‘obsolete’. Within this continuum, at any moment, a particular building’s fitness for purpose can, in theory, be located. Clearly, an analysis of a building’s fitness for purpose involves a clear understanding of ‘purpose’. As a building’s physical condition deteriorates, it may become relatively less fit for one purpose while remaining perfectly fit for another. So one response to perceived obsolescence may be to refurbish the building so that it remains fit for its current purpose, while another response might be to do nothing to the building and, instead, alter its function by putting it to some new purpose.

A building may become obsolete for the purposes of its current owners and users while being perfectly fit for the purposes of some other interest group. To give one example: a dilapidated school may become an unfit place to carry on the education of children but, in its present location and state of repair, it may offer perfectly adequate warehousing facilities to a retail trader. Nobody is sure for what purpose Stonehenge was originally built: it currently acts as a heritage site and tourist attraction and, in that function, is more-or-less fit for purpose. Obsolete buildings are not always renewed, sometimes they are transferred into some other use. In their new use they once again become fit for purpose.

The relative nature of the concept can be underlined by asking the question, ‘Is Stonehenge

obsolete.

Fig 3.2

OBSOLESCENCE

response

DECISION

RENEW DISPOSE

Fit for purpose again

Proprietary and Non-Proprietary Interests

We approach the question of distinctive interests by reference to a conceptual frame that distinguishes between the authority to make decisions and the rationale for making them[12]. In this way a distinction is made between ‘power’ and ‘intent’. The model is used to distinguish between proprietary and non-proprietary interests where a ‘proprietor’ is seen as someone or some organization that has a right or title to something that enables them to hold it as property. This frame then enables us to disentangle the ‘private’ interest from the ‘public’ interest and within that distinction, to analyse rights and duties that are legally enforceable, politically significant, ethically important and socially or economically desirable.

Fig 3.3 Proprietary Analysis

Proprietary analysis is used to make the point that, when analysing obsolescence, it is not what buildings are that matters so much as how they are valued in use. In other words, our ultimate concern is with the question of what buildings do for and to people. We will consider this question by seeking to understand how people value the buildings in which they have some sort of interest.

When considering the legal and economic relations associated with land and landed property it is more useful to talk of ‘proprietorship’ than of ‘ownership’. This is because people or organisations other than just the freeholder may have some sort of stake in an individual plot or building.

Legal proprietorship is about tenure. In legal terms, a proprietor is someone who has a right or title to something that enables him or her to hold it as property. Although in everyday speech the term ‘property’ is commonly used to indicate the physical object to which various legal rights relate, in proprietary analysis the word is used to denote the legal relations appertaining to such an object. In this way, ‘property’ is not conceived of as a concrete ‘thing’ but as a condition of belonging to some person or persons and is best thought of as comprising a bundle of rights relating to the possession, use and disposal of an object such as a building.

The idea that a multiplicity of interests can be associated with one particular building is well illustrated by reference to housing. The fact that dwellings constitute both personal consumption and private investment highlights the point that people have proprietary interests[13] vested in residential property. The fact that dwellings can be partly or wholly funded from the public purse and that society as a whole is concerned about what happens to the housing stock, highlights the point that there are also non-proprietary interests vested in residential property. Proprietary housing interests refer to the concerns of those who have a direct and private stake in the property – such as tenants, landlords and owner-occupiers. Non-proprietary housing interests refer to the concerns that the wider community have for the property. These indirect, wider public interests are sometimes referred to as externalities (see fig 3.4).

Fig 3.4

A proprietor will have both legal and economic interests vested in the property. Whereas a legal interest specifies the nature and scope of a proprietor’s rights and authority to use or physically alter a particular building, an economic interest determines his or her motivation for using, disposing of, or altering it in some way. It can be said that legal proprietary interests are about power and welfare/economic proprietary interests are about intent.

Proprietary plans

Decision-making takes place at different levels. Strategic decisions are concerned with which policy is best. Tactical decisions are concerned with how best to achieve the policy option selected. This means that strategies are about goal options and tactics are about implementation options.

Analysis and option appraisal techniques such as CBA are tools to be used in helping US to determine what WE mean by “best”. What counts as the ‘best’ tactical option depends on the strategic context in which we are working. This ‘context’ is sometimes thought of as a ‘goal’ (strategic planning), a ‘mission’ (TQM), or plan (proprietary analysis). If our proprietary plans change, we may need to make alterations to our built assets to accommodate (literally!) these changed expectations. We need to utilise the buildings to achieve our strategy – so if the strategy alters (e.g. revised mission) or our circumstances change (e.g. changed level of resourcing), we may need to make tactical changes that involve making alterations to the envelope or internal layout of our built assets.

The Question of ‘Value’

It is welfare/economic interests that underlie a proprietor’s attitude towards the property and provide the rationale for making use of it or looking after it in a particular way. The welfare/economic stake that someone has in a building can take the form of a consumption interest or an investment interest.

Consumption and investment are related categories that are linked through the concept of value. The word ‘value’ comes from the Latin valere – to be strong – to be relied upon – to have worth. So the ‘value’ of something is that attribute that makes it, in some sense, worthy of use. If something has no use it is worthless and if it is worthless, it has no value.

The economic value of building is composed of three interrelated factors; namely, its potential selling price (its exchange value), its potential usefulness (its ‘utility’ or use value), and its potential to yield a return on money capital committed (its investment value). At any time, a building’s exchange value will be determined by the perceptions of potential purchasers about its current use and/or future investment value. The real, underlying, fundamental economic value of a building is determined by what it does – its usefulness, and in the final analysis, it is this that determines both its investment value and its exchange value. In the end, all economic value is grounded in current or potential use-value.

Consumption and the notion of use value

The end-purpose of a building is to provide what economists refer to as utility. Utility is thought of as that characteristic of a commodity that makes someone want to use or ‘consume’ it. The amount of utility one gets from using something depends as much on one’s needs and preferences at the time as it does on the intrinsic characteristics of the commodity. This means that a glass of water generates more utility to a thirsty person than it does to someone who is not thirsty. As with water, so with buildings. A particular building may generate more utility for me than it does for you because we have different accommodation needs.

Utility is generated in use and is acquired when some purpose has been fulfilled by that use. A building’s ultimate purpose is to contribute to the proprietary plans of its end-users. This means that it can only be said to have utility (and thus value) in so far as it is able to function in the interests of its occupiers.

With time, buildings deteriorate and proprietary plans change and as a result, the occupiers may deem it necessary to alter a building’s shape, condition, style or form so that it more adequately fits their needs and plans.

As obsolescence occurs, a building’s use value diminishes, and because use value is the foundation of all value, obsolescence normally results in falling investment and exchange values.

Capital and the notion of investment value

As durable assets, buildings may physically outlive the current functional needs of their occupiers. There is the potential for them to have a future as well as a current economic life. Their future exchange value will be determined by how future potential purchasers value their usefulness at that time. This means that locked into the current exchange value of a building is some potential for capital appreciation. This is sometimes referred to as ‘hope value’.

The purpose of investment is to generate a yield (return on capital). This yield can be in two forms – capital appreciation and trading income. If, for example, you invest in a retail shop, the premises may gain in exchange value over time and over time you will also receive a flow of income from trading. Similarly, if you buy shares in a company, those shares may appreciate in value and also generate a flow of income in the form of yearly dividends. Of course, the ability to generate a flow of income and the rate of capital appreciation are intimately linked. It is the potential of the asset to generate consumption value (utility) that gives it a capital value.

Public sector organisations may see the return on investment in social rather than commercial terms. The return society gets for investing in a hospital may best be thought of in terms of improved health rather than in terms of a trading profit.

For many organizations who own rather than rent the buildings they occupy, landed property constitutes the most valuable part of their total fixed capital formation: this is as much true for domestic households as it is for private firms and public bodies. It is even more true for those organizations whose function it is to be a private or public sector landlord. This being the case, maintenance and renewal activity might be carried out wholly or partly to maintain or enhance the investment value of the organization’s built assets. In other words, the rationale for maintaining, improving or altering the physical form or condition of a building may be to protect the owner’s investment interest rather than (or as well as) the occupier’s consumption interest in the property (always bearing in mind that the two are linked).

Disposal and the Notion of Exchange Value

The exchange value of a building is represented by its selling price. Exchange is the mechanism by which use and investment values are realised. By selling the proprietary interests in a property its use and investment values are exchanged for cash; that is, they are ‘liquidated’.

The notion of ‘value’ is intimately tied up with questions of proprietary and non-proprietary ‘interests’.

Proprietorial motivations

To make a decision to do something to a building (acquire, construct, maintain, repair, refurbish, improve, convert, demolish, dispose) you need power and authority (a legal interest) and motivation (an economic interest). That is, you need some sort of proprietary interest in the property. The potential of a building to generate utility and a financial or social return affects a proprietor’s attitudes towards spending money on its acquisition, improvement or maintenance. What people or organisations choose to do with or to a building depends partly on their financial resources[14] and partly on the nature of their proprietary interests. If the property is regarded as an item of consumption (e.g they regard it as a ‘home’) the proprietor will weigh up the price of buying, renting, repairing or maintaining and compare it with the utility he or she would expect to acquire in return for such an outlay. If, however, a building is regarded as private or social investment then the proprietor will weigh up any proposed expenditure and compare it with the anticipated yield resulting from the investment outlay.

Non-proprietary interests

To say that someone has an ‘interest’ in a property is to say that they have some stake in or duty for the way in which it is produced, used and looked after. The extent to which the construction, use and maintenance of a particular built structure is seen to be of concern to the wider community, determines the degree to which it is regarded as a social good. To say that a building has the characteristics of a ‘social good’ is to make the point that there are non-proprietary as well as proprietary interests vested in it.

Society as a whole may have concerns about built structures that go beyond, or are even in conflict with, the interests of those who have a proprietary stake in them. For example, a housing association or a private company may wish to pursue their welfare or commercial objectives by developing a plot of land with a view to providing dwellings to let. The resultant development might obscure a view, create traffic congestion, destroy a wildlife area, or in some other way affect the interests of others.

It is possible that the state may decide to enforce proprietors to do things to their properties or prevent them from doing other things in order to protect wider non-proprietary interests. Furthermore, in pursuance of non-proprietary interests, the state may acquire properties by means of compulsory purchase orders.

Summary

All values are grounded in use value and every type of obsolescence is grounded in functional obsolescence. This means that with respect to renewal decisions, what counts as ‘right action’ depends upon an understanding of the proprietary and non-proprietary interests being pursued.

In this chapter we have argued that there are three broad reasons for carrying out works to buildings; namely, to enhance proprietary consumption interests, to enhance proprietary investment interests, and to enhance non-proprietary interests.

Academic surveyors and building economists often make the point that, over time, a building can become less suited to its purposes for a variety of reasons and that this indicates that there are various types of obsolescence[15]. By contrast, our argument is that, fundamentally, all obsolescence is ‘functional obsolescence’. However, it is true that this dysfunction may have a variety of origins. In other words, a building’s inadequacies can stem from more than one source.

Obsolescence is crucially concerned with the relationship between location, form and condition on the one hand and function on the other.

Fig.4.1

OBSOLESCENCE

FUNCTION

mismatch

LOCATION FORM & CONDITION

Obsolescence manifests itself as a mismatch between [location/ form/ condition] on the one hand and [function] on the other.

The notion of obsolescence brings to the fore the following question: ‘Is this building in this place, in this form, in this condition, suited to our current needs and future plans?’ In other words, the notion of obsolescence focuses attention on a building’s use value.

Included in the notion of a building’s ‘form’ is its size, material make-up, external style and design, and internal layout. ‘Condition’ includes those factors that establish a building’s basic integrity (make it safe, sound and aesthetically pleasing) and those factors that contribute to its technical efficiency (e.g. affecting heat and noise transference). The building’s decorative state is also included as an aspect of its ‘condition’. Together, form and condition define a building’s physical and material nature (what it is). A building’s location defines a building’s position in geographical space (where it is). A building’s use value will be affected by both what it is and where it is.

FORM AND CONDITION AS SOURCES OF OBSOLESCENCE

In the introduction we made it clear that we are treating the physical life of a building as one process or cycle that contains within it a sequence of shorter cycles that determine the timings of periodic maintenance and renewal activities (see chapter 1, fig.1.1). This integrated model treats construction, maintenance, improvement and repairs activities as all part of the same overall life cycle. Only by thinking and planning in this integrated way can we hope to achieve sustainable outcomes. The integrated approach highlights the connections between the level of investment in construction and major repairs work on the one hand and the subsequent costs-in-use on the other. It also underlines the point that what we do to a building at any point in its life cycle will have cost consequences for the future.

The integrated model embraces the whole life cycle of the building (Fig.1.1). Our argument (general theorem) is that, at any point in the life cycle, a decision to alter the location, condition or form of a building is always made with a view to counteracting some perception of obsolescence. These perceptions are clarified and codified by condition surveys.

Condition appraisal

The obsolescence diagram (chapter 2, fig.2.1) indicates that the elements of buildings deteriorate at different rates. This means that decisions about the maintenance and renewal of buildings should be informed by knowledge about component life-spans.

Life-cycle costing (LCC) is a technique that seeks to assign an expected ‘service life’ (or ‘lifespan’) to a range of building components and materials in order to help property managers plan for future repair and replacement costs. The technique utilises data taken from academic research and the publications of manufacturers and trade bodies (e.g. the British Wood Preservation Association). However, it has to be recognised that the data is based on average lifespans and any prediction of a service life is never going to be more than an educated guess.

Experience shows that the performance of identical components can vary considerably, and consequently a component’s service life cannot be predicted with accuracy. Relevant variables include how well the component is installed, its design suitability, the frequency and level of maintenance, its location within a building, its frequency of use, and exposure conditions. The insurance industry takes account of these variables by constantly reviewing the performance of materials and only expecting components to last for a proportion of their average service lives.

Life-cycle costs can be defined as follows:

The total costs associated with owning an asset over its operating life. These could include all outgoings associated with the following.

* Land and building acquisition.

*Site clearance.

*Planning consents and other statutory charges.

*Design and construction.

* Loan charges or loss of interest on money capital during the development period.

* Land and property taxation and insurance.

* Planned or anticipated maintenance and renewal including repairs, decoration, and replacement of components.

* Unanticipated major repairs and renewals or insurance premiums to cover premature failures.

* Alterations, conversions and improvements.

*Planned refurbishment and renewals

* Running costs that are affected by the building’s form or condition, such as cleaning, heating, ventilation, and security.

* Depreciation.

* Clearance and disposal.

*Legal, consultancy and financial fees and charges associated with any of the above.

Some of the cost categories listed above have a direct relationship with the life cycle of components (most notably ‘replacement’ and ‘renewal’) while others are indirectly affected (such as ‘running costs’).

Cycles within cycles: redevelopment, refurbishment and maintenance

If the building’s form is the source of obsolescence then consideration has to be given to whether to initiate a programme of rehabilitation, improvement, renewal or redevelopment. This will bring up complex questions about the level of action to be taken. These questions are considered in detail elsewhere, and those interested are directed to: Garnett D, To Redevelop or Rehabilitate? A CBA Approach to Decision Making, UWE 1994.

Maintaining the condition of a building’s component parts involves maintenance activity. The physical life of a component can be critically affected by the nature and scope of maintenance activity. Before going on we will therefore say something about maintenance.

The Meaning of ‘Maintenance’

Each element in a building has a specific function and has its own physical life; it therefore has its own maintenance requirements. The term ‘maintenance’ is taken to refer to the various programmes of work carried out to maximise the useful lives of the component elements of existing buildings. It includes both the mending of damaged or malfunctioning elements and the servicing of working elements.

Mending and servicing can be triggered by occupier requests (‘reactive’ maintenance) or by a rolling schedule of works (‘planned’ maintenance).

As defined by BS 3811, maintenance comprises all of the technical and associated administrative actions intended to retain a building and its facilities in a state that will allow it to perform its required functions. By emphasising the functional viability of a building this definition implies that appropriate maintenance is determined by non-technical as well as technical factors. If a light bulb fails in a domestic living room it would be inconvenient; if it fails in a stairwell it would be dangerous; if it fails in a hospital operating theatre it could be life-threatening. In other words, maintenance planning has to take account of more than the technical integrity of the element – it also has to be informed by functional needs.

Given what we have just said, an effective maintenance policy should consider the relationship between the following needs: preventive replacement; occupier demands; and minor works contracts for repair work commissioned in response to new or changing proprietary needs, post-occupancy surveys, and fire, storm or vandal damage.

Towards a maintenance strategy

As indicated above, maintenance work is often classified as ‘planned’ and ‘reactive’.

Reactive Maintenance is characterised by low value and high volume with an emphasis being placed on relatively fast response times.

Planned Maintenance can be divided into ‘condition-dependent’ (prompted by condition surveys) and ‘condition-independent’ (prompted by schedules based on life-cycle data).

Scheduled planned maintenance is often centred on some form of service contract and the work may be triggered chronologically or by some other factor such as ‘hours run’. Condition-based planned maintenance is usually centred on some form of condition survey and the work to be done will be determined by what the surveyors find.

The two primary approaches available for developing a strategy for planned maintenance are (i) present value costing, and (ii) property profiling.

present value costing This approach involves a static rather than a dynamic analysis of the future and centres on the notion of the time value of money (see chapter 1 above and Garnett D, The Theory and Practice of Cost-Benefit Analysis, UWE 1994, chapter 4). It can be thought of as a ‘snapshot’ approach and asks the question ‘what sum of money do we need to invest NOW in order to be in a financial position to replace the component or renew the building in x years time?’. It is a static ‘snapshot’ approach rather than a dynamic ‘moving picture’ approach; i.e. we plan our policy on our current, one-off picture of the condition of the stock.

As a valuation technique, present value costing gives us a ‘snapshot’ figure of future costs based on assumptions NOW about future replacement times, building cost inflation, and discount rates. If we alter any of these variables (assumptions) we need to recalculate – that is, take another ‘snapshot’. Only if we run enough ‘snapshots’ together do we get a dynamic ‘moving picture’.

Although surrounded with uncertainties about future costs, the technique is conceptually simple. It looks to the future from the perspective of the present moment.

Property profiling This approach involves a dynamic rather than a static analysis of the future and centres on the notion of life-cycle costing. Is can be thought of as a continually changing moving picture of the stock condition. In financial terms, this condition-flow can be translated into a cash-flow. In other words, this technique plots, and continuously checks, the changing condition of building elements and then translates this stock profile into an expenditure profile. It charts a flow of expenditure through time rather than presenting a picture at one moment.

The technique requires the analyst to chart the projected condition changes and consequential expenditure requirements – e.g. an annual line graph or a histogram blocked into (say) five year periods. This then illustrates the cost profile over a given period (such as the life of the building or the term of the mortgage).

Before setting up a profiling system the following issues and questions have to be addressed.

1. What exactly is to be profiled? What level of elemental detail is to be charted? What level of detail are we interested in? Are we profiling the whole building, sections, elements, or parts of elements? – The house, the bathroom, the sink unit, the taps, or the washers? In an industrial unit, do we profile the heating system as a whole, or do we break it down into valves, radiators, or whatever? Consider the two extreme cases:

(a) A building costs £x to build now…..and in 60 years time, will cost £y to renew.

The question of detail can be approached by cross- referencing a category of element to an identified location.

2. Good decisions should be based on good data. Assumptions have to be made about the following: prices, life spans, discount rates, inflation.

Pricing = Quantity times Rate. E.g. Price times sq mtr. of tiles; or price times number of boilers. The problem here is knowing how to forecast rates into the future.

Quantity is determined by ‘judgement forecasting’. This is an ‘expert’ forecast. Three possible models present themselves.

(i) Abstract model. Do no survey at all and base decisions on existing knowledge. Local knowledge is likely to be more accurate (less generalised) than national data so long as the organization keeps appropriate records.

(ii) Survey model. This is the other extreme and involves measuring every component physically.

(iii) Inferred model. This is the ‘halfway house’ and involves grouping similar properties together, measuring one that is typical of the group and multiplying up.

3. The rate is determined by the materials used and the materials used will depend on the replacement policy. Do we replace like with like, or do we assume that technology moves on? Priorities (within proprietary plans) change so that we are now, for example, more concerned with insulation than we used to be.

4. Life span data helps us determine WHEN to replace. Presumably at the end of the component’s ‘life’…..but what ‘life’? We define the life of a component by reference to the notion of obsolescence and we can identify different potential replacement points (PRPs).

The physical prp is reached when the component cannot be repaired any more.

The functional prp is reached when it fails to do the job required of it (even if it is in good physical condition).

The technological prp is reached when new technology produces a better product (even if the existing component is still sound and functioning).

The financial prp is reached when the component is paid for. This is sometimes referred to as the ‘economic life’ of the component. In accounting terms it is seen as significant if the asset was acquired by means of a mortgage or a commercial loan. This is because many lenders will expect the loan to be repaid within the ‘life’ of the building or component. They do not approve of debts being outstanding on assets that no longer exist.

The social prp is reached when it fails to meet legal or socially acceptable standards. Changes in the law, style or fashion can render a component obsolete (even if it is functioning as well as it ever did).

The locational prp is reached when the activity would be better sited somewhere else. For example, the building of a new by-pass may make a cafe or petrol station on the old road non-viable.

5. The choice of discount rate. (Refer ICE An Introduction to Engineering Economics). The general rule is that the discount rate chosen should reflect the sources of funding for the project (e.g. equity or loan funding). Discount rates are related to commercial rates of interest but can be modified to take account of the funder’s view of risk and uncertainty. If the funder wishes to be particularly cautious, for example, the discount rate may be set higher than general commercial rates of interest.

Interest is paid to overcome liquidity preference, and comprises two elements: return on investment and risk. The more uncertain I am, the more I want for risk-taking. (E.g. if one in fifty fail, I want to add to the 49 another 2% to be covered without loss).

We have made the point that the use value of a building can be diminished by the changing social or economic circumstances of its proprietors and/or by the deteriorating physical condition of the structure or the fabric. We must now make the point that locational factors can also affect a building’s use value.

An understanding of what it is that determines the value of land and landed property has been a constant objective of economic theorists for at least two hundred and fifty years. In the early nineteenth century Johann Heinrich von Thunen developed the ideas of Francois Quesnay, Adam Smith and David Ricardo into a comprehensive model that established the notion of a ‘distance-cost’ relationship that has since become the basis of modern location theory. By stressing the relationship between market area and transport costs von Thunen shifted the emphasis of the debate away from the question of ‘fertility’ to the question of ‘location’ and in so doing, opened up our understanding of how location underpins the use-value of land and landed property.

Classical location theory argues that the value of a site is reflected in the rent that can be charged for it. Von Thunen’s basic thesis is that, if land is of uniform fertility, the prime determinant of rent will be location. Von Thunen’s ideas were produced when agriculture was the dominant industry and he argued that because the farmers’ proprietary interests are enhanced by operating close to their markets, they will bid up rents and sale prices of plots that are conveniently located close to the centres of population. Conversely, plots on the distant periphery of urban centres will command lower rents as, being farther from the market, they tend to have a lower use value to the farmer proprietors. He made the point that nearness to markets was of more importance to some types of farming (e.g. dairying) than to others (e.g. forestry) and, in so doing, his model offered an explanation of the structure of rural land use as well as of rural land values.

In this way, along with fertility, early agricultural land theory identified location as a key determinant of proprietary use value. Location plays a key part in the capacity of a parcel of land to produce an income for the farmer. The more convenient the location, the greater the productivity, and the greater the productivity the greater the potential farm income, and the greater the income the more farmers are able and willing to pay in rent. In this way, early location theory drew a relationship between location and rent. Classical theory makes the point that rent is determined by a property’s capacity to earn an economic surplus. If, over time, the location becomes less favoured for some reason, the tenant farmer’s surplus may diminish. If this happens, the land and buildings may become uneconomic as far as he is concerned and either the rent would have to fall or the site and its buildings would transfer to some other agricultural use. In this way, classical theory makes the point that over time an agricultural holding can become obsolete for locational reasons.

In the early twentieth century, theorists developed von Thunen’s agricultural model into a theory of urban location. Like von Thunen, they emphasised the importance of a site’s ‘accessibility’. However, the point was now made that a site’s use-value may be enhanced by the accessibility it affords to a whole range of urban facilities (not just nearness to markets).

“Since value depends on economic rent, and rent on location, and location on convenience, and convenience on nearness, we may eliminate the intermediate steps and say that value depends on nearness.” [R.M.Hurd, Principles of City Land Values, 1903].

This notion gave rise to the fundamental idea behind all modern location theory – site value is a function of distance [SV = f(d)]. From this hypothesis writers such as William Alonso and Harry Richardson developed the idea of the ‘bid-rent – distance‘ relationship that is usually presented in the form a rent curve. The overall rent gradient emerges from a series of bid-rent curves and illustrates a situation where falling rents compensate for falling revenues and higher operating costs. The theory is developed to suggest that different land uses will have different rent gradients, and the highest rents will be paid for those land uses that generate enough revenue to pay for the accessibility advantages that centrally-located sites avail.

Fig 4.2

Fig 4.2 represents an urban land market operating under competitive conditions and in which ‘0’ represents the urban centre and ‘D’ the city periphery. The top half of the diagram represents differential land values that in this sort of analysis are usually referred to as “urban rents”. The bottom half of the diagram represents spacial differentiations that are usually referred to as “districts” or “zones”. The model as a whole seeks to illustrate how, under competitive conditions, it is market bidding that determines the spacial structure of land values and uses.

In this highly theoretical model, it is assumed that competitive bidding allocates each site to its ‘highest and best’ use. This means that those activities generating a relatively high income out-bid less ‘productive’ activities for the favoured central locations. ‘a’, ‘b’, ‘c’, and ‘d’ represent the four linear rent-distance functions (i.e. rent gradients) of four competing land uses. Activity ‘a’ out-competes all other uses between ‘0’ and ‘A’; ‘b’ dominates between ‘A’ and ‘B’; and so on. The combined curve abcdD represents the overall rent gradient for the urban area as a whole.

The lower half of the figure transforms the land value model into a representation of land-uses in which particular economic activities are seen to be located in different zonal areas concentrically spreading out from the central business district to the urban/rural fringe.

The whole of traditional location theory is based upon the assumption that the urban area has a single nucleus and that the market for land and property is perfectly competitive. This means that, at best, the model is a highly stylised reduction of reality.

Although in reality most urban areas are not built around a single industrial or commercial centre and no urban land and property market operates under conditions of perfect competition, the basic tenets of traditional location theory still apply. By this we mean that the use-value of a site can be crucially dependent upon its location. Be it a factory, shop, office, school, hotel, restaurant, or a unit of residential accommodation, the proprietary interests of those who use or own the site and its buildings are much affected by what facilities or disutilities are located nearby.

In our own time the proposition that location is a significant determinant of property values has taken on the status of a truism. The force of the value/siting relationship is captured by the concept of neighbourhood effect value. The neighbourhood effect value (NEV) is defined as that part of a property’s value that is determined by its location. As every estate agent knows, the NEV can amount to a significant proportion of a property’s total exchange value. This is because exchange-value stems from use-value and use value is enhanced by the accessibility advantages afforded by the site’s location close to valued facilities or diminished by proximity to unwelcomed noise, smells, crime-spots, or some other urban disutility. When a proprietor acquires use of a shop or a hotel or a dwelling, they are, to some significant extent, renting or buying a location as well as a building.

Over time, the locational advantages or disadvantages of a particular site may alter in ways that enhance or diminish the property’s fitness for purpose. These changing circumstances can generate both push and pull pressures on proprietors to relocate. In particular, civil engineering projects associated with transport tend to generate strong push and pull pressures. By way of example, consider the consequences of new road construction. Let us assume that a new by-pass is built that redirects traffic away from an established route. This could result in a dramatic reduction in business for a road-side cafe on the old route while, at the same time, significantly increasing the business of a similar establishment close to the new route. The first cafe’s business may decline to the point at which, at the present location, the building becomes obsolete in its current use. On the other hand, the new road link makes the other cafe’s business more viable and may well attract new cafes to set up in competition with it on the newly constructed highway.

Locational push and pull factors can take a variety of forms and they can affect households as well as firms. For example, when their children reach certain ages, some domestic households relocate to new educational catchment areas in order to qualify them for entry to highly regarded schools (pull factor). Other households may choose to move house to get away from unfriendly neighbours, noisy traffic, lost amenities, or some other ‘push’ factor.

Many locational pressures build up slowly in an incremental fashion. For example, the economic base of the area in which the building is located may be gradually weakening making the location less and less suited to the proprietary plans of the owners and users. Where this is appreciated plans can be made to relocated to a more appropriate site sometime in the future.

When a location becomes less satisfactory with respect to a proprietary plan (be it industrial, commercial, social, or domestic), relocation is not always regarded as a favoured option. Because relocation is disruptive and costly there exists what is sometimes referred to as locational inertia. It would not be rational for a businesses or a household to uproot and relocate unless the push or pull factors were such that the long-run marginal benefits of the move outweighed the relocation costs.

Summary

In essence, all obsolescence is ‘functional obsolescence’. The key sources of obsolescence are form, condition and location.

Form and condition determine a building’s physical nature and location determines its geographical position.

Changes in form involves decisions about refurbishment and redevelopment and are considered in Garnett (1994b). Changes in condition involve decisions about maintenance. Maintenance refers to the various programmes of work carried out to maximise the useful lives of the component elements of existing buildings. Maintenance can be reactive or programmed.

Place and space (location) play an important part in determining whether or not a building is fit for purpose. Traditional location theory emphasises this point by analysing the relationship between location, productivity and site value.

CHAPTER FIVE

RESPONDING TO OBSOLESCENCE: OPPORTUNITY COSTS AND THE PROPRIETARY PLAN

So far we have argued that renewal and relocation decisions are triggered by perceptions of fitness for purpose. We now need to make the point that to be able to respond to such perceptions we need money. What we effectively do to our built assets depends, to a large extent, on what we can afford to do. A building is only effectively obsolete when there is both a judgement made that it is no longer fit for purpose and a decision made to allocate resources do something about it.

Effective obsolescence exists when a perception of obsolescence is acted upon. In allocating resources to decorate, repair, alter, refurbish, improve, demolish or dispose of a built asset we are making effective our perception of obsolescence. Responses to obsolescence are generated by the application of judgement to information. Among other things, this application of judgement will involve an appraisal of the opportunity costs involved in any proposed commitment of cash. The money that we eventually decide to spend on our buildings could have been spent on some other project. In spending it in this way we are making a judgement that there is no higher and better use for our money capital.

This means that our response to perceived obsolescence will be informed by our judgement about whether or not these built assets in this condition and in this place are appropriate to our proprietary plans and if not, whether we can afford to do anything about it. If they are perceived to be fit for purpose there is no economically rational reason for doing anything at all. If they are not perceived to be fit for purpose, we may or may not judge it to be appropriate to act. Before taking action, the opportunity cost question has to be asked:

‘Is investing this amount of money in these assets in this way at this time, the best use of our limited financial resources?’

By asking the opportunity cost question we bring up the possibility that the rational thing to do is not to invest in a building, even though we recognise that such an investment would make it function “more adequately”. That is, despite a perception of obsolescence, we nevertheless decide that, given the limits of our resources, our proprietary objectives would be better progressed by investing the money in some other way. In this case, the obsolescence would be perceived but not effective.

The distinction between perceived and effective obsolescence is important because it is the key to making rational decisions. It underlines the point that we are not seeking “the technically best solution” but “the technically best solution in the light of our corporate aims and limited resources.” In a poor country a health clinic may be judged by building surveyors to be in a poor state of repair but, given the district authority’s modest health-care objectives and the limited money available, the buildings may not be deemed to be effectively obsolete and, as a result, only minor works are carried out. By contrast, the same buildings in a similar town in a rich country that has higher health-care expectations and more resources, may be deemed to be effectively obsolete and as a result demolished so that the site can be redeveloped to produce a new modern health centre.

Taking an opportunity cost approach to built asset management

Responsible asset management decisions must be based on more than technical information. The distinction between perceived and effective obsolescence brings home the point that built asset management decisions should be based on an opportunity cost appraisal that takes proper account of three key factors:

*How the building is perceived to function (the technical information).

*How we want the building to function now and in the future (the proprietary plan).

*What we can afford to do (the available budget).

To say that a building “functions” is to say that it plays a part in fostering some benefit to an identifiable individual or group (i.e. it contributes to the proprietary plan). This means that in order to determine whether, and to what extent, we need to make effective our perceptions of obsolescence, we not only need information about the asset’s physical condition, but we also need to be aware of what interests are vested in its continued existence (refer back to chapter 3). The question that has to be addressed is:

‘Given the other claims on our limited financial resources, what can be done to this building so that it more adequately contributes to our proprietary plan?’

By focusing on proprietary plans we are making the point that we have to take account of the future consequences of any proposed decision. Of course, the future is full of uncertainties and part of the job of the professional built asset manager is to use his or her expertise to reduce these uncertainties so that decisions made now about the use of buildings are not regretted at some future date. This means that we are not so much concerned with future decisions as with the futurity of present decisions.

Our decisions have to be rationalised by making ‘because statements‘ (refer back to chapter 2). When the because statements are based on appropriate information, subjected to systematic and open analysis, take account of all the other claims on our limited resources, and demonstrably relate to the needs of the organisation, they can be said to constitute an opportunity cost appraisal. The objective of an opportunity cost appraisal is to provide an analytical framework for making rational decisions about the employment of scarce resources. This framework would typically take the form of a report to a committee or management group and it should incorporate the three principles of rationality, systematism and openness pointed to in chapter 2. The presentation should be grounded in experience and based on research. Any decision model or expert system that is developed from the appraisal should have universal coherence, have an appropriate scope of vision and make appropriate connections. It should also be context-sensitive, so that the universal logic can be applied in a way that is appropriate to the needs of a particular situation. The appraisers must seek out and use appropriate techniques to achieve the above (CBA, life cycle costing, or whatever). Guided by the report, the decision-makers have to make decisions about best practice and set in motion arrangements for implementing such decisions. Consideration has to be given to the successful implementation of the decisions particularly where they involve some change in policy.

Conditions necessary for successful policy implementation

The policy literature points to the necessary and sufficient conditions to bring about policy change and decision implementation. These are normally reckoned to be (a) necessary and sufficient support for the proposals, (b) necessary and sufficient legitimation to implement the proposals, and, (c) the proposals must be feasible.

Support. The argument is that, where possible, all groups involved in implementation should be party to the decision. Where implementing groups do not feel a sense of ‘decision ownership’, they may not see it to be in their interest to cooperate, particularly where a change in policy is involved. This is because change carries political risks and costs time and money. Unless the change is supported by the various departments, agencies and individuals involved, particular interest groups will find ways of blocking or distorting implementation. Therefore, we need a tactic for gaining support, particularly where policies cross departmental and agency lines of responsibility. Support is needed for the style of implementation as well as for the idea itself.

Legitimacy focuses on the question, ‘Is action within the department’s/organisation’s/individual’s accepted sphere of competence and authority?’.

Feasibility focuses attention on the organisation’s capacity to deliver the decision in a way that is judged to be efficient and effective. The notion of ‘capacity’ embraces finance, technology and administration. A ‘good’ and ‘worthy’ proposal may not be feasible, but its worthiness may persuade us to go ahead. The lack of feasibility means that, at some time in the future, there will be an implementation failure that requires us to shift into “crisis management”. It is to avoid this that a feasibility study has to be part of option appraisal. Feasibility has to be addressed at three levels of decision-making: pre-planning (MRA), planning (strategy) and implementation (tactics). They are all linked and from the pre-planning stage onwards we must attempt to reconcile some of the problems associated with implementation.

Summary

Effective obsolescence occurs when there is both: (i) a perceived mis-match between location/form/condition on the one hand and function on the other, and (ii) a commitment to allocate resources to rectify this mis-match.

All decisions to allocate resources should be opportunity costed to ensure that we are making the ‘best’ use of our limited funds.

The question of how to implement the decision should be taken into consideration at the very start of the planning exercise. Successful implementations have to be supported, legitimate and feasible.

CHAPTER SIX

PROJECT APPRAISAL AND THE USE OF ‘EXPERTS’

“I know of no teachers so powerful and persuasive as the little army of specialists.” (Oliver Wendell Holmes Jr).

This chapter is concerned with how to make an appropriate use of experts and consultants when making decisions about the siting, maintenance, repair and renewal of buildings. Our argument will be that, whether internal or external, experts should not normally be given an open brief and indeed, should not be briefed at all until those with the ultimate responsibility for decisions have agreed the consultancy’s terms of reference. Experts provide specialist knowledge that contributes to, but does not determine, the decision about what constitutes best action. Consultants and professional advisors do not have legitimate authority (see chapter 5) to make final decisions; they should be used to advise those who do have such authority. Advisors should not relieve decision-makers of the task of determining how to respond to perceptions of obsolescence. In terms of the arguments in this paper, we can say that consultants can offer new perceptions of obsolescence or can be used to test, challenge and reshape the organisation’s own existing perceptions. What consultants should not be allowed to do is to impose, in an uncritical way, their particular understandings of what ought to constitute effective obsolescence. It is not the job of internal experts and outside consultants to determine the organization’s values and mission.

The importance of pre-planning

In the language of multiple rationality analysis (MRA), consultants bring specialist knowledge to bear on the ‘planning’ rather than the ‘pre-planning’ process. The best use of consultants is made when they understand what it is that the organisation is seeking to achieve. Our research with social housing organisations has shown that, where there has been little or no pre-planning before briefing consultants, the ‘exerts’ tend to offer rational, but inappropriate, courses of action based on their own professional values and attitudes rather than on those of the client organisation.

Pre-planning starts with fundamentals by asking the question, ‘what is the purpose of the proposed activity?’ In terms of the discussion we have already had, there are three broad, possible reasons for carrying out works to buildings; namely, to enhance proprietary consumption interests, to enhance proprietary investment interests, and to enhance non-proprietary interests. The pre-planning meetings should set the broad context for policy development by establishing the balance of interests and values that the proposed course of action is seeking to enhance and the time period being considered. If these are not clear then an MRA exercise should be carried out to establish the value and time parameters within which specific courses of action are being sought.

At the start of this pamphlet we made the point that over time buildings deteriorate with wear and tear, and interests shift with changing circumstances. This means that sustainable decisions have to be based on policies and pre-plans that make clear the balance of ‘interests’ being pursued (tenants, shareholders, future generations, or whoever) – what we do depends on in whose interest we are doing it. It also means that the appraisal has to address the ‘time-cost dilemma’ and be set within a clear decision time frame – what counts as ‘best action’ will depend on how far into the future we wish to plan. It is these sorts of contextual issues that MRA seeks to clarify and the pre-planning exercise seeks to establish.

The most obvious reason for not giving technical experts an open brief is that there is no definitive, simple and ‘technically correct’ way of responding to perceived obsolescence. This is because, although obsolescence may have a technical aspect, it is, by definition, more than a technical issue. A building surveyor can carry out a condition survey but this will provide only part of the picture. How we perceive obsolescence depends, in large part, on the nature of our proprietary plans, and how we respond to this perception will depend on how we assess the opportunity costs associated with any proposal. This means that attempts to determine the nature and scope of the effective obsolescence involves the application of judgement to information.

Experts may have information that the client does not possess and they may be able to provide new insights that can be drawn upon in carrying out the opportunity cost exercise. By interacting with the client they may also help the organisation to clarify its aims and objectives – but they cannot know better than the organisation itself what values and interests constitute the bedrock of its function. No-one knows more about its function than the organisation itself. The proposed works are to be carried out as a response to obsolescence and, as we have argued throughout, in the final analysis, all obsolescence is functional obsolescence. This means that any expert advice has to reinforce or reshape, but not replace, the organisation’s judgements about what to do.

Those with the responsibility for making the final decision need to have a shared understanding of what they mean by “effective obsolescence”. It is the proprietors’ perceptions of obsolescence that have to be acted on (made effective) – not the perceptions of the consultants and professional advisors. Our research at UWE has shown that some organisations have commissioned consultants, such as surveyors, without providing terms of reference that are tied into their own proprietary interests and plans. This has resulted in the receipt of advice and proposed courses of action that later turn out to be inappropriate.[16]

Appointing and briefing consultants

Appraisal is a process that involves the marshalling of evidence in order to make a decision. The quality of the appraisal is dependent on the appropriateness and comprehensiveness of the data and the appropriateness of the marshalling techniques employed. Every appraisal operates in relation to some specified objective.

In selecting consultants we are choosing ‘expert witnesses’ to give informed opinions rather than appointing ‘judges’ to give definitive rulings. Expert witnesses bring to the option appraisal experiences and ways of thinking that are steeped in the traditions of their own professional cultures. Both the type of experts consulted and the nature of the brief they are given should be determined by the pre-planning exercise. In order to provide a coherent brief, the client organisation must be clear why they are consulting this particular type of expert.

An example: the rationality of the valuer

Suppose, for example, the pre-planning exercise highlighted a particular concern to protect and enhance the organisation’s investment interests. This may lead to the appointment of a firm of valuers to give expert investment advice. It is important that the organisation is clear that in commissioning a firm of valuers, they will received a report that is grounded in the traditions, models and disciplines of land economics and estate management. Valuers are particularly concerned with investment values and interests and they have been educated and trained to think about property in a particular way, viz:

Looked at from the rationality of the valuer, we can say that landed property is economically obsolete when the present value of the expected future net returns from the land and buildings in their current form and use become less than, or equal to, the current site value, after taking all clearance and redevelopment costs into account.

To obtain the present value of the expected future net returns from an existing property, it is necessary to calculate the property’s expected net returns (ENR), including capital appreciation, minus operating costs[17]. A valuer will then argue that the property is economically obsolete when the building’s ENR is less than or equal to the ENR in its next best use – taking conversion or redevelopment costs into account.

An appraisal embraces more than one rationality

It may be that the pre-planning exercise identified other concerns about which valuers would be ill-equipped to advise. In addition to the proprietary investment interests there may be a political imperative to refurbish the buildings and redevelop part of the site in a way that protects an adjacent wildlife area. This may lead the organisation commissioning a specialist consultant to carry out an environment impact analysis of any proposed course of action.

An appraisal brings judgement to bear on information (data). Where there is poor judgement or a lack of information, inappropriate decisions are likely to result. Interpretation is the bridge that links information and judgement. However, interpretation is embedded in some form of structured rationality (values and attitudes). In this way judgement can be warped by the distorting lens of a particular rationality. Valuers and environmental impact analysts can bring useful skills and insights to the appraisal of a proposed project but any judgements they make will be skewed by their particular professional points of view. They, along with any other appropriate specialists, should be invited to offer comment, explanation and advice from the point of view of their specialised knowledge. This then constitutes part of the data

upon which decision-makers have to apply their own judgement about how to utilise this data to further their proprietary plans.

One approach to limiting the distortions that result from competing rationalities is to carry out the analysis in a way that is systematic. This involves using an established technique such as cost-benefit analysis (CBA). Such techniques do not prevent the appraisal from being distorted by the value judgements of the analysts but if used creatively they may help to make those value judgements explicit. (Refer Garnett (1994a), chapter 5.

Summary

Consultants should be selected and briefed in accordance with the conclusions of the pre-planning exercise. The client should be aware of the professional values and attitudes of the consultant and the consultant should be made aware of the corporate objectives of the client.

Because obsolescence is always relative to the proprietary plan, those with the proprietary interests must always make the final decisions. Specialist advice is to be consulted and cross-examined and never followed blindly.

Bibliography

Daithi D Downey Pulling Mussels from their Shells: An Investigation and Critique of the Conceptualisations of Public Sector Housing Renewal, School of Construction, Housing & Surveying, Occasional Paper Vol.1, No.8. University of Westminster Press, 1994.

What is the purpose of pre-planning and multiple rationality analysis?

……………………………………………………………………………………………………

[1] As Stone points out, “the costs of buildings do not cease with the costs of construction but continue throughout the life of the building in the form of maintenance and other running costs, the costs of adaptation to meet the changing requirements….(etc)..” (Stone.P.A. 1967). Life cycle cost research seeks to explicate the relationship between construction costs and subsequent costs-in-use.

[3] The term ‘pre-planning’ refers to our notion of multiple rationality analysis (refer to the bibliography). The argument is that traditional option appraisal techniques such as CBA are not sufficiently critical and tend to be limited by their commitment to values that are tied to market ideology. Furthermore, both CBA and techniques grounded in impact analysis are ‘uncreative’ in that they do not generate options but rather evaluate options that are already proposed. That is, they are ‘second stage’ (planning) not ‘first stage’ (pre-planning) techniques. At the pre-planning stage a more consciously critical methodology needs to be sought.

[4] An “essentially contested” concept is one in which the very structure of its meaning is disputed by theorists and commentators. Refer Gallie W.B. (1955) ‘Essentially Contested Concepts’, Proceedings of the Aristotelian Society, 56, pp.167-98.

[8] The theory and practice of this technique is discussed in Garnett (1994a).

[9] Our research and consultancy work in the field of building renewal shows that such advice is often biased in favour of a set of logical principles grounded in the discipline of building technology.

[10] Note, for example, current concerns about that lack of provision that many young people are making for their pensions.

[11] The idea that money has a ‘time value’ is explained in the companion booklet: Garnett (1994a), chapter 4, section 4.5.2.

[12] This approach is based on a technique known as ‘proprietary land use analysis’. It is based on work done at the Department of Land Economy in the University of Cambridge. Readers interested in this approach to analysis might refer to Denman, Prodano & Sylvio (1972), Land Use: An Introduction to Proprietary Land Use Analysis, Allen & Unwin; or Denman D.R. (1978), The Place of Property, Geographical Publications Ltd.

[13] There may be a number of different legal proprietary interests attached to a particular dwelling. In addition to the freehold interest, individuals may possess leasehold or tenancy interests in the dwelling and neighbouring households may have rights to use, enter or cross part of land or building(s) in order to carry out certain functions.

[16] Some of the most startling mismatches between client needs and ‘expert’ advice are in overseas projects where the technology transfer being proposed fails to take account of local cultural, economic or climatic conditions.

[17] Note from the OBSOLESCENCE diagram that as obsolescence sets in, both maintenance and management costs tend to rise.